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About Personal Finance

Personal Financial Planning, in the broadest sense, is an effort to manage all aspects of a person/family’s financial affairs.  Classically, that begins with planning family spending and extends through risk management (insurance), taxes, wealth accumulation, investing, and wealth distribution (retirement and estate planning).

personal-finance

In general, personal financial planning has five steps:

  1. Assessment: One’s personal financial situation can be assessed by compiling simplified versions of financial balance sheets and income statements. A personal balance sheet lists the values of personal assets (e.g., car, house, clothes, stocks, bank account), along with personal liabilities (e.g., credit card debt, bank loan, mortgage). A personal income statement lists personal income and expenses.
  2. Setting goals: Two examples are “retire at age 65 with a personal net worth of $1,000,000” and “buy a house in 3 years paying a monthly mortgage servicing cost that is no more than 25% of my gross income”. It is not uncommon to have several goals, some short term and some long term. Setting financial goals helps direct financial planning.
  3. Creating a plan: The financial plan details how to accomplish your goals. It could include, for example, reducing unnecessary expenses, increasing one’s employment income, or investing in the stock market.
  4. Execution: Execution of one’s personal financial plan often requires discipline and perseverance. Many people obtain assistance from professionals such as accountants, financial planners, investment advisers, and lawyers.
  5. Monitoring and reassessment: As time passes, one’s personal financial plan must be monitored for possible adjustments or reassessments.